Note 1: New styles and rapidly changing consumer preferences resulted in a $71,500 loss on the disposal of
discontinued styles and related accessories.
Note 2: The corporation sold an investment in marketable securities at a loss of $39,050. The corporation normally
sells securities of this nature.
Note 3: The corporation sold one of its warehouses at an $86,350 loss.

Instructions

Identify and discuss the weaknesses in classification and disclosure in the single-step income statement
above. You should explain why these treatments are weaknesses and what the proper presentation of the
items would be in accordance with GAAP.

Solution Preview

1. We do not include sales tax collected in sales revenues. Sales tax collected is a current liability. Therefore, we should report gross sales only.

3. Cost of goods sold includes sales taxes paid on inventory (if any) only. However, sales tax collected is a current liability, and its payment is the liquidation of that liability. Therefore, cost of goods sold should not include sales taxes paid other than those which are assessed on inventory.

4. Purchase discounts and freight-in and freight-out are listed as part of the cost of goods sold section. These all relate to the acquisition of inventory.

5. The excess of net sales revenues over cost of goods sold is Gross Profit. This element should be identified between cost of goods sold and operating expenses.

6. Operating expenses should be listed alphabetically. In this case, we would list bad debts expense, rent, and then salaries and related payroll expenses.

7. Most businesses have ...

Solution Summary

Given a company's income statement in poor form, this solution illustrates how to identify and discuss the weaknesses in classification and disclosure in the statement, including why these treatments are weaknesses and what the proper presentation of the items would be in accordance with GAAP.